Insurance Journal examined industries experiencing changes and expansions in the past year. Here are the top 10 market sectors that just might deliver hot opportunities for agents and brokers in the property/casualty insurance industry in 2014.
Private Flood Insurance
Private (re)insurers today have the capacity to provide coverage for flood risk along with new technologies and a better understanding of flood risk – all of which could increase private insurers’ interest in providing flood insurance, according to Fitch Ratings. More sophisticated risk mapping and modeling tools mean the private industry is more able to provide coverage and more accurately price the risk.
Several states, including Florida and West Virginia, have advanced legislation to give private insurers more leeway in policy forms, underwriting and pricing in hopes of increasing the availability of private flood insurance.
However, there are obstacles to a private flood market. The obstacles include political and consumer resistance to full cost-based pricing of flood risks, a resistance demonstrated by the legislation to roll back rate increases under the Biggert-Waters Flood Insurance Reform Act of 2012.
While private (re)insurers have the capacity to cover flood risk according to Fitch, they need to be able to charge actuarially sound rates to be willing to write significant amounts of risk.
The efforts to delay Biggert-Waters “may reinforce private insurers’ skepticism that they would ever be permitted to charge adequate rates and make their participation unlikely in the foreseeable future,” according to a recent Government Accountability Office (GAO) report.
Despite the unwinding of the Biggert-Waters reforms, there are some who think there is opportunity in the private flood sector.
The Flood Insurance Agency, located in Gainesville, Florida, is now selling private flood insurance underwritten by Lloyd’s of London in 15 states and making it available to commercial risks and apartment buildings.
Also in Florida, Homeowners Choice Property and Casualty Insurance Co. is offering a flood insurance endorsement for its existing 140,000 homeowners policies that the company says will cost the same as what homeowners have been paying for their NFIP policies.
Insurance software firm Vertafore formed a partnership with flood insurance policy processing firm StoneRiver National Flood Services (NFS) to provide agents an easier way to quote flood insurance.
Also, federal regulatory agencies will soon require lenders to accept private flood policies to satisfy the mandate that certain homebuyers in flood hazard areas purchase flood insurance.
If federal subsidies for flood insurance are reduced and the cost of government-provided insurance goes up, the demand for private flood coverage could also rise. The reduction or elimination of federal assistance could create a potential opportunity for traditional private (re)insurers or alternative capital markets to serve this sizable market. But it remains to be seen if the private market would be able to provide sufficient capacity at an economically viable price.
Accountable Care Organizations
Accountable Care Organization’s (ACO) – networks of healthcare providers working together to offer a full range of healthcare services – have so far emerged as the most popular healthcare delivery model of the Affordable Care Act. But insurers have struggled with how to best insure these, says Mike Grady, president of independent agency Grady Professional Services, a medical professional liability insurance agency operating in 15 states.
Grady says all of the different coverages ACO’s require and the different exposures from insuring large physician groups, have left many med mal companies scratching their heads.
“It’s going to be interesting to see the Doctors Companies, the Medical Protectives, the ProAssurances of the world figure out, ‘Hey, with this large ACO, do we need to handle their property and their workers’ comp, as well as their managed care liability, their directors and officers coverage, and their malpractice piece?,'” says Grady.
Perhaps that’s why many of the products created for ACO’s have been from traditional property and casualty insurers.
CNA launched a product that addresses the full range of exposures ACO’s face, including: healthcare professional liability; directors and officers liability; business errors and omissions – with managed care E&O; cyber liability; and privacy and social media.
ACE USA’s Medical Risk Group introduced a range of physician professional liability products and coverage options targeting hospitals, healthcare facilities and ACO’s providing insurance or alternative risk financing to their employed physicians or owned or affiliated medical groups.
NAS Insurance introduced a professional liability insurance program for ACO’s that combines E&O and D&O coverage that address regulatory exposures, as well as cyber liability. The policy also offers MEDEFENSE Plus for billing errors and regulatory claims.
The Dodge Momentum Index – a monthly measure of nonresidential building projects in planning – slipped 2.6 percent in February compared to the previous month. However the drop in “builder momentum” is expected to be just a brief pause in a broader upward trend, according to McGraw Hill Construction, which publishes the index.
The year 2014 began slowly, due to behavior specific to each of the three main construction sectors, said Robert A. Murray, chief economist for McGraw Hill Construction.
Nonresidential building in 2013 advanced 7 percent, but the progress was occasionally hesitant, including sluggish activity at the end of last year that carried over into January, Murray said. The prospects for continued growth for nonresidential building during 2014 are generally positive.
Residential building in 2013 climbed 24 percent, but towards the end of last year growth began to decelerate as mortgage lending to first-time homebuyers remained stringent, Murray said. The January slowdown for housing was due in part to tough winter weather conditions.
Meanwhile, competition among insurance markets remains strong for the construction segment and has kept rates from rising dramatically across most construction lines in 2013, a trend that should continue in 2014, according to Marsh’s “Insurance Market Report 2014” released in February.
There is still a lot of capacity in the industry and some of it is new capacity that has come into the industry over the last two to three years, Michael Anderson, managing director and CEO of the U.S. Construction Practice for Marsh, told Insurance Journal.
“There has not been any significant uptick in the overall rate levels, but underwriters have been a little more selective in individual account underwriting based on a given contractor’s loss experience,” he said.
A few notable expansions in the construction market include:
Berkshire Hathaway Specialty Insurance introduced a consolidated endorsement which combines numerous primary general liability coverage enhancements in a single product designed for construction wrap ups and project-specific programs.
Pioneer Programs Insurance Solutions expanded its specialty program, Contractor’s Choice, to now include excess liability.
XL Group partnered with the American Contractor’s Insurance Group, a construction industry owned insurance organization, to provide data and analytics for clients.
Directors & Officers
It is no secret that the D&O market has seen a flurry of claims activity since the financial crisis in 2008. Financial institutions saw the brunt of the claims against directors and officers, with an estimated one-third of the directors and officers of failed financial institutions between 2009 and 2010 being sued by the Federal Deposit Insurance Corp., according to a report by Cornerstone Research.
While many insurers have opted to stay away from this segment, new entrant Berkshire Hathaway Specialty Insurance says it is committing to the class for the long term with a new product for directors and officers of financial institutions.
Dan Fortin, senior vice president of Executive and Professional Lines for BHSI, says their approach to being successful involves being selective in pricing and with whom they insure, as well as partnering with brokers who share their perspective.
“In a seven to 10 year period, there will be a time when underwriting results will not be pretty. But that can be offset by some very good years,” says Fortin.
That being said, there are plenty of other issues that are keeping underwriters and their D&O insureds awake at night.
According to Rachel Turk, D&O underwriter at Beazley, the frequency of merger and acquisition claims against directors and officers are going up and so are the defense costs, which erodes the retention of limits faster. “It is a very active claims environment but also very different because we are now seeing an increased frequency of claims that affect the primary and low level limits,” she says.
Beazley formed a consortium with Hiscox so the two insurers could offer combined limits of $50 million to the commercial D&O segment, excluding financial institutions.
Turk says the goal of the consortium is to give the two London-based markets a “seat at the table” when it comes to providing D&O coverage to U.S.-based companies.
Another segment of the D&O market that is ripe with opportunity is the non-profit sector. Travelers, which updated its D&O coverage for public, private and non-profit organizations earlier this year, conducted research in the fourth quarter of 2013 on nonprofit buying habits and found that 69 percent of the more than two million U.S. nonprofits don’t have D&O coverage.
The top four reasons the carrier found for nonprofits not to purchase coverage were: lack of perceived risk, lack of budget, lack of necessity, or they felt the coverage was not affordable.
“The lack of perceived risk is most concerning,” says John Trefry, D&O product manager for Travelers’ Bond and Financial Products. “There is a knowledge gap and that is valuable information,” he says. “We are trying to encourage our trading partners to educate their nonprofit clients.”
Capacity in this marketplace has increased tremendously in the last five years, as has demand, but it is not keeping pace with what the insurance marketplace has produced. Instead, all that capacity is pushing rates down in a segment that has tremendous opportunity for – and evidence of – loss.
The year 2013 might be considered a “cyber tipping-point” – or the point at which businesses and governments finally realized the severity of the threats they were facing, says Advisen, a New York-based commercial insurance research and data analytics firm.
In its annual survey on information security and cyber liability risk management, Advisen found that the vast majority of respondents (89 percent) believe that cyber and information security risks pose “at least a moderate threat” to their organization, but only 52 percent of respondents reported purchasing cyber liability as a result of that threat.
The threat is real and increasing. Headlines from the massive Target breach, Nieman Marcus, and other high profile incidents are helping to push demand for cyber coverage, particularly among large companies.
“[The buy rate] among larger companies was probably around 20 percent five years ago and is now in the 50-percent range, with at least 70 percent of the market considering cyber coverage,” says John Kerns, executive managing director for Beecher Carlson in the New York office.
Where the demand is not increasing as rapidly is among small to medium-size organizations. Advisen found that only 5 percent of companies with revenues under $5 million buy coverage.
Some agencies, like Connecticut-based Business Risk Partners, are encouraging small and mid-market clients to purchase coverage by emphasizing the add-on services that comes with it. BRP began offering standalone data breach/privacy coverage through Liberty International Underwriters in January.
Hiscox has also enhanced its coverage for small- to mid-size organizations with a cyber crime endorsement launched last fall.
Superstorm Sandy taught insurers and insureds a lot about the importance of protecting fine art collections. Considering fine art insurers reportedly faced claims of up to a half a billion dollars from art owners since the storm, according to a report by Reuters, it is no surprise that insurers are putting that knowledge to use.
Michelle Impey, fine art director for Fireman’s Fund, says disaster preparedness and proper storage of expensive art pieces, were a couple of the major lessons from the storm that ravaged New York in October 2012. But Sandy also reinforced the fact that insurers and insureds need to work together to protect these high value “passion investments”.
“Everyone says with insurance you don’t realize how valuable it is until you’ve experienced a loss,” says Impey. “So certainly for those who have experienced a loss, unfortunately, they’re going to be thinking about it.”
A number of insurers have launched new and enhanced coverages for the fine arts segment this year, including:
MarketScout acquired a specialty fine arts and collectibles facility providing nationwide coverage for all types of fine arts and collectibles and offers property coverage for museums, exhibitions and galleries.
Fireman’s Fund introduced “death of an artist” loss settlement coverage as well as seven other coverages and provisions to its Prestige Collections Coverage, which addresses elements of fine arts acquisition and ownership.
XL launched a luxury lines program for private clients that includes XL’s ArtWorks fine arts and collectibles coverage.
AXA ART formed a strategic business partnership with Trident Insurance Services to offer fine art insurance coverages.
The marijuana industry is turning over a new leaf, and there is plenty in the pot to go around. Last year, Colorado and Washington State’s voters approved the sale of marijuana for personal use. In January – the first month of Colorado’s legalized retail sale of cannabis to those 21 years or older – customers spent more than $14 million purchasing marijuana or related products from state licensed facilities, according to information from NORML, a non-profit working to reform marijuana laws nationwide. NORML also reported that as of mid-March, more than 150 licensed retail facilities were approved to operate in the state and that number is expected to grow.
Washington State received nearly 1,700 business license applications from people seeking to grow, process or sell cannabis during the first month of the new recreational marijuana law, according a report by the Associated Press.
Nationwide, 20 states and the District of Columbia have approved the use of marijuana for medical purposes and so far this year, California, New Mexico, Alaska, Florida, and New Hampshire are reevaluating
marijuana restrictions either for medical or recreational purposes.
So what does all this mean for the insurance industry? New business opportunities abound and new products are needed. Many exposures go into the growing, selling and storing of marijuana and businesses need specialized insurance that can protect them from carrying such a controversial product. There can also be legal issues for dispensary and retail store owners surrounding federal vs. state laws.
MMD Insurance, a specialist in marijuana industries, launched a products and completed operations with health hazards coverage and removed the “marijuana and its derivatives” exclusion explicitly.
“The insurance industry has taken awhile to embrace the aspect of cloud computing. But as more companies move to clouds, the insurance industry has to recognize that data won’t be in an internal server but in the cloud,” says Fred Bartkiewicz, co-founder and partner of CyberRiskPartners, which develops and manages risk mitigation platforms for cloud companies through its subsidiary, CloudInsure. “Insurers have not fully embraced this technology and how it works.”
Businesses are reallocating IT operational costs away from hardware and software and human capital to a service platform – the cloud. However, many do not have contracts that require third parties to cover all the costs associated with a data breach. This is a concern as many cyber liability products either exclude data loss by a third-party provider or have minimal coverage. As more companies turn to cloud providers better coverage options are needed.
Cloud computing is gaining in popularity. Gartner, a business technology research and consulting firm, predicts that the bulk of new information technology (IT) spending by 2016 will be for cloud computing platforms and applications with nearly half of large enterprises having cloud deployments by the end of 2017. The worldwide cloud-based security services market totaled about $2.1 billion in 2013, and Gartner expects that to rise to $3.1 billion in 2015.
The cloud computing industry’s growth will continue to drive insurer interest in product development.
Liberty International Underwriters partnered with CloudInsure last summer to provide insurance backing for cloud providers and the businesses that utilize them.
CloudInsure also formed an agreement with Lockton at the beginning of 2013, which allows it to establish relationships with primary insurers to offer liability.
And most recently, Oceanwide Inc. launched its Cloud Provider Assessment Model (CPAM) designed for the insurance industry to give IT and information security groups a method of comparing cloud technology providers. CPAM allows the IT professional to compare multiple cloud providers side-by-side in order to assess risk.
Almost every business, in one way or another, is affected by weather. And as extreme and unpredictable weather continues to disrupt businesses and bring big losses to the insurance industry, underwriters and the weather technology industry have stepped up their efforts in deploying more accurate weather prediction models.
So far this year, severe winter weather has totaled more than $1.5 billion in insured losses from about 175,000 claims and 2014 is expected to be the fifth costliest year in the last 34, according to estimates from the Insurance Information Institute. Winter losses in 2013 totaled $2 billion.
Creative insurance products have helped insureds deal with some of the business interruption and business income losses that can result from weather.
Christian Phillips, contingency underwriter for Beazley, says the big cost to businesses from severe winters like this one can come from snow removal and event cancellations. Last year, the insurer expanded its Weather Guard contingency coverage to the United States to help businesses against the business risks of extreme weather. The coverage assists clients to develop weather-related sales promotions, stabilize revenue or contain costs.
Demand has increased for the product this year because clients are looking for ways to protect their balance sheets, says Phillips. The company uses a meteorological database with more than four decades of data and information from more than 5,500 weather stations nationwide to help insureds monitor perils that could interrupt or cost them revenue.
Phillips says with issues like rising sea temperatures, the polar vortex, and increased heat that leads to drought – just to name a few – more clients are going to rely on insurance to keep their businesses stable through unpredictable weather.
“There’s no indication that it’s going to change,” he says.
Technology has become an intrinsic part of modern medicine, but the convergence of technology and medical advancements are leading to a new world of risk that insurance underwriters must solve.
Implantable medical devices now use wireless connectivity. New technologies such as long and short range wireless communications, cloud computing and information security can now connect to many medical devices such as patient monitors, wearable devices including those which regulate and monitor heart rate, as well as online self-diagnostics and medical apps.
“The introduction of remote access to these types of devices has clearly presented the issue of hacking in a new light,” says Graeme Newman, director at CFC Underwriting, a specialist lines UK-based underwriting agency.
Technological developments such as 3D printing are also making a mark on the medical industry. In 2013, scientists from Cornell University successfully created an artificial human ear by printing it on a 3D printer. Many speculate that technology could pave the way for purpose-built replacement organs in the near future.
But using such modern-day medical devices doesn’t come without risk.
“Connecting our bodies and DNA to the internet exposes a whole new world of risk, not only for the user, but for manufacturers, developers, software companies and even back bedroom coders,” Newman says.
Within as little as five years the world could see the creation of products and medical devices never before imaginable. Some insurers, such as Berkley Life Sciences, Travelers, and ACE, are forging a coverage path for life sciences companies, which could be a predictor as to what markets are willing to cover these risks as they evolve.